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Company Delta operates in the mechanical components manufacturing sector, marketed to several end applications. The manufacturing activity is carried out in two plants, employing about 600 employees. The main geography to market the products is the national one. Its clients are industrial and distribution companies.

The company commercializes its products through agents. In order to define its competitive strategies, Delta has recently carried out some research aimed at detecting the key factors driving its clients' purchasing behavior. This study has shown that the following factors are the most important ones:

● Delivery speed (almost as much as punctuality)

● Price, above all in the cases of standardized products used for pretty straightforward applications

● Possibility to receive consulting services and assistance both prior to and after the purchase

The following paragraphs will analyze the main hypotheses formulated by Delta management to develop its plan (which spans a time horizon of five years).

Assumptions on Revenues

Taking into account the activity carried out by Delta:

● Expected revenue forecast in t1, t2, and t3 has been quantified on the basis of the forecasts of:

● Revenue volume and market price in the reference market, developed by some leading research provider companies

● Delta market share

● Revenue associated with the main clients (based on the commercial reviews carried out for the principal clients at the end of t0)

● Expected revenue has been obtained as the sum of:

● Revenue as is: defined on a client-by-client basis, assuming that execution of the business plan commercial actions does not take place.

● Additional revenue from new commercial activities: they concern both the old and the new (expected) clients, and are based on the expectations of Delta management around the effects of the implementation of the business plan (new applications, improvement of existing products, etc.). The quantum of this improvement has been estimated also based on the probability of success of the new commercial activities displayed in Exhibit 2.6.

● Revenues expected in t₄ and t₅ have been calculated based on the forecast for the volumes and prices in the reference market in the medium/long term.

Exhibit 2.6 Revenues as is vs. additional revenue from new commercial activities

Exhibits 2.7 2.8, and 2.9 represent, for each category product, the expected evolution in sales volumes, unitary prices, and revenues.

Exhibit 2.7 Evolution in sales volumes (€)

Exhibit 2.8 Evolution in unitary prices (€)

Exhibit 2.9 Evolution in revenues (€)

Assumptions on Industrial Costs

In the business planning process, Delta management has identified two types of industrial costs: variable costs and fixed costs.

Variable costs are linked to the industrial activity and can be ascribed, in particular, to:

● Raw materials

● Outsourced production

● Transportation

● Energy

● Direct labor costs

Variable costs account for over 70 percent of total operating costs each year (excluding the D&A), and have been quantified:

● Based on the expected production volumes for each product category (formulated to calculate the expected revenue as well)

● On a single product basis

● On the back of forecasts on the unitary cost for each production factor (cost per kilogram of raw material, cost per single manufacture, hourly cost for direct labor, etc.) (Exhibit 2.10)

Exhibit 2.10 Evolution in the unitary cost for each production factor

Fixed costs can be mainly ascribed to:

● Indirect labor costs

● Services

● Maintenance

● Waste management

The above costs have been forecast by adopting different logics and drivers than the ones used to determine variable costs:

● Indirect labor costs have been quantified based on the forecasts on number of employees and unitary average cost per employee.

● Costs for external services and maintenance costs have been set equal to a percentage of the revenues.

● Waste management costs have been assumed to grow at a yearly rate equal to expected inflation factor.

Overall, fixed costs do represent approximately 30 percent of total operating costs (excluded D&A) over the forecast years.

Assumptions on the Commercial Costs

In the business planning process, Delta management has also identified variable and fixed commercial costs.

Variable costs are made up by:

● Transportation

● Agency services

These have been estimated based on the hypotheses used to forecast the sales.

Fixed costs can be ascribed to:

● Inventory management

● Commercial area employees

Personnel cost has been quantified on the back of the forecasts for:

● Employees number

● Average mean cost per employee

The other costs, instead, have been assumed to grow each year at the expected inflation rate.

Overall, commercial costs amount to about 7 percent of revenue, for each year over the business plan period. Fixed costs represent more than 80 percent of commercial costs.

Assumptions on the Working Capital

Delta net invested capital is for the major part represented by working capital, defined as the algebraic sum of trade credits and inventory, net of trade debts. Over the business plan period:

● Trade credits have been quantified based on the average days sale outstanding.

● Trade debts have been quantified based on the average days payable outstanding.

● Inventory stock has been quantified based on the average days worth of inventory (Exhibit 2.11).

Exhibit 2.11 Hypotheses underlying trade credit, trade debts, and inventory

Conclusions

Delta case shows us some general rules applicable to business planning for industrial companies manufacturing standardized products:

● Usually, planning process starts from the forecasts on sales volume and market prices evolution, developed by independent third parties (like research institutes and the like). Management assumptions are instead the ones about:

● Company market share

● Revenue streams linked to the major clients

It is then good practice to estimate analytically the effects (on the market share, sales volumes, and prices) deriving from the competitive strategies that management wants to pursue over the business plan period:

● The major portion of the operating costs is represented by the industrial costs, whose quantification is driven in particular by the hypotheses on:

● Production volumes per product category (formulated to quantify the expected revenues)

● Unitary cost per production factor

● Usually, another important component of the operating costs is represented by the commercial costs, which can be variable (transportation costs, agency costs, etc.) or fixed (inventory management costs, sales force costs, etc.).

● The relevance of the R&D costs is a function of the very products manufactured by the enterprise.

● The significance of the promotional activity costs is a function of the final client nature:

● Generally speaking, if the product is marketed to the final consumer, it is necessary to heavily invest in promotional activities aimed at promoting the company product and direct final clients' purchasing choices to it.

● Conversely, if the product is marketed to another industrial company (this is the case of semi-finished products, or of manufacturing machinery), then the promotional activity financial burden will be minor.

● In general, industrial companies manufacturing standardized products do have relevant working capital stocks in their balance sheets. Usually:

● Trade credits have been quantified based on the average days sale outstanding.

● Trade debts have been quantified based on the average days payable outstanding.

● Inventory stock has been quantified based on the average days worth of inventory.

● Capital expenditures (capex) are to be ascribed mainly to the industrial apparatus:

● Maintenance capex, necessary to maintain the normal operations of the production apparatus, can be hampered by obsolescence.

● Growth capex is aimed at upgrading the current manufacturing/production capabilities of the company PPE.